Stocks Plummet. Next Up: More Liquidity

The Dow Jones Industrial Average plunged 513 or 4.31% today (Aug. 4). The Nasdaq swooned 5.08%, and the Standard & Poor's 500 dropped 4.78%. Stocks in Europe sold off, too; problems in countries such as Italy are adding to previous woes in Greece, Ireland, Portugal, and Spain.

The euro may not survive. More and more economists fear the U.S. economy is headed into a double-dip recession. Probably tonight the U.S. Federal Reserve and central banks around much of the world, particularly Europe, are expected to coordinate a massive liquidity gusher. The Federal Reserve may well launch a third program to buy Treasury paper to run long term rates lower. Short rates are already close to zero.

The worst possible scenario may be the most realistic one: investors may be waking up to the fact that stocks have zoomed since early 2009 while the economy has gone sideways, despite the record low interest rates. Consumer spending has been absolutely flat of late. Congressional, Treasury, and Federal Reserve policies have all been aimed at running up the stock market, which basically helps the richest 10%. Now, investors are realizing that consumers -- the other 90% -- who make up 70% of the economy, are excessively indebted and won't be spending.

That Moment of Truth may have set off today's selloff. However, that argument is logical; Wall Street isn't. On the short run, the markets are likely to respond positively to the liquidity gusher created by the central banks.

Comments

If you keep squeezing the folks responsible for 70% of the economy it shouldn't come as a surprise that the economy tanks.
It's hard to understand why all these titans of finance can't figure out basic Econ 101.

As I have said so many times, one morning the nabobs raking in $15 million a year in this plutonomy (an economy designed to accommodate the rich only), will wake up and say, "What happened to those consumer markets that made us rich?" They still won't understand it. Best, Don Bauder

Don't worry. Stocks are backed by the honesty and intelligence of the corporate CEOs.
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And the honesty and intelligence of Wall Street, Federal Reserve, Congress, and the White House. Best, Don Bauder